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From Tyler Cowen, writing at MarginalRevolution about a separate post by Scott Sumner:

…a lot of the debate about taxation is more about showing the wealthy that they need to lose (or win, on the other side of the debate) a few political battles than it is about actual canons of efficiency or, for that matter, even well-specified theories of egalitarian justice. For instance, I find that few proponents of a higher inheritance tax realize it will increase current consumption inequality by encouraging the wealthy to consume more rather than paying the tax. Nor do they seem to care, once this is pointed out.

Thanks to Dr. Shawn Ritenour for sharing this article by the Acton Institute’s Samuel Gregg, published by The American Spectator.

“Crony capitalism is about hollowing-out market economies and replacing them with what may be described as political markets.

In political markets, the focus is no longer upon prospering through creating, refining, and offering products and services at competitive prices. Instead, economic success depends upon people’s ability to harness government power to stack the economic deck in their favor. While the market’s outward form is maintained, its essential workings are supplanted by the struggle to ensure that governments, legislators, and regulators favor you at other people’s expense. In that sense, crony capitalism certain constitutes a form of redistribution: away from taxpayers, consumers and business focused on creating wealth, and towards the organized, powerful, and politically-connected.”

“There was and is always the choice between maintaining, increasing, or consuming capital. And past and “present” experience tells us that the decision in favor of consumption of capital is far from being impossible or improbable. Capital is not necessarily perpetual.”

The second is from Hayek:

“This basic mistake–if the substitution of a meaningless statement for the solution of a problem can be called a mistake–is the idea of capital as a fund which maintains itself automatically, and that, in consequence, once an amount of capital has been brought into existence the necessity of reproducing it presents no economic problem.”

“What frustrates [economists] is [ecologists’] tendency to think in terms of static limits. Ecologists can’t seem to see that when whale oil starts to run out, petroleum is discovered, or that when farm yields flatten, fertilizer comes along, or that when glass fiber is invented, demand for copper falls.”

He continues later:

“This disagreement goes to the heart of many current political issues and explains much about why people disagree about environmental policy. In the climate debate, for example, pessimists see a limit to the atmosphere’s capacity to cope with extra carbon dioxide without rapid warming. So a continuing increase in emissions if economic growth continues will eventually accelerate warming to dangerous rates. But optimists see economic growth leading to technological change that would result in the use of lower-carbon energy. That would allow warming to level off long before it does much harm.”

Piketty and his admirers define “capital” as a homogenous, liquid pool of funds, not a heterogeneous stock of capital assets. This is not merely a terminological issue, as those familiar with the debates on capital theory from the 1930s and 1940s are well aware. Piketty’s approach focuses on the quantity of capital and, more importantly, the rate of return on capital. But these concepts make little sense from the perspective of Austrian capital theory, which emphasizes the complexity, variety, and quantity of the economy’s capital structure. There is no way to measure the quantity of capital, nor would such a number be meaningful. The value of heterogeneous capital goods depends on their place in an entrepreneur’s subjective production plan. Production is fraught with uncertainty. Entrepreneurs acquire, deploy, combine, and recombine capital goods in anticipation of profit, but there is no such thing as a “rate of return on invested capital.”

While this analysis is somewhat advanced, suffice it to say that Piketty’s use of the “rate of return on capital” is a cheap shot. It oversimplifies the complexity inherent in the capital structure and, frankly, economists like Piketty should know better. In this vein, Klein continues:

In short, profits are amounts, not rates. The old notion of capital as a pool of funds that generates a rate of return automatically, just by existing, is incomprehensible from the perspective of modern day production theory. Solow states: “The key thing about wealth in a capitalist economy is that it reproduces itself and usually earns a positive net return.” This is a nonsensical statement from the point of view of microeconomics, entrepreneurship, uncertainty, innovation, strategy, etc.

Again, the “rate of return on capital” is an oversimplification at best and logically incoherent at worst. Comparing it to the general rate of economic growth might yield interesting results, but nothing meaningful toward crafting policy (or toward a sturdy argument for higher taxes, for that matter).

I must say I haven’t read Piketty’s book. I hope to get around to it this summer.

(And in case you have no idea what I’m talking about, Piketty’s book is #1 on Amazon right now. It’s gotten rave reviews from progressives like Paul Krugman and the Obama administration, as it purportedly justifies many of the views about inequality progressives have been preaching for years — namely, that inequality is a serious problem that threatens the health of the economy as a whole and will only get worse without significant state intervention.)

Like many progressives, Piketty doesn’t really believe most people deserve their wealth anyway, so confiscating it presents no real moral dilemma. He also argues that we can measure a person’s productivity and the value of a worker (namely, low-skilled laborers), while at the same time he argues that other groups of workers (namely, the kind of people he doesn’t admire) are bequeathed undeserved “arbitrary” salaries. What tangible benefit does a stockbroker or a Kulak or an explanatory journalist offer society, after all?

Thomas Picketty’s book Capital in the Twenty-First Century is #1 on Amazon. It’s become a big hit among progressives, who, in Harsanyi’s words, see it as an intellectual validation for their preconceived notions about the evils of capitalism.

“A planner can’t build an entire city (or neighborhood eve) because she can’t begin to design and construct the necessary diversity and social intricacy that happens spontaneously in a living city. And I don’t think she should even try because it can irreparably damage, even kill, the living flesh of a city. What can government do? In the ordinary course of its activities a government can perhaps at best refrain from doing the things that would thwart the emergence of the invisible social infrastructure that gives rise to diversity, development and genuine liveliness.”

I recommend the entire article. For me, it brought to mind childhood memories of playing computer games like SimCity, Civilization and Age of Empires. What games like this have in common is they allow the player to play dictator–view cities from the top-down, manage their economies, identify problems and create solutions by drawing upon knowledge of how the cities’ inhabitants (modeled to act like real human beings) respond to various stimuli. It’s great fun, and can make managing an economy seem relatively easy once the game’s rules and parameters are understood.

But of course, no model can account for the awe-inspiring intricacy that is the human mind, no matter how advanced. While it might be possible to centrally plan a city in the virtual world, it’s impossible in real world, where rules and parameters are always changing.

Arthur Brooks, president of the American Enterprise Institute, has a great column in today’s New York Times.

Tibetan Buddhists actually count wealth among the four factors in a happy life, along with worldly satisfaction, spirituality and enlightenment. Money per se is not evil. For the Dalai Lama, the key question is whether “we utilize our favorable circumstances, such as our good health or wealth, in positive ways, in helping others.” There is much for Americans to absorb here. Advocates of free enterprise must remember that the system’s moral core is neither profits nor efficiency. It is creating opportunity for individuals who need it the most.

We often hear that the American manufacturing industry is in major decline. In fact, the point often goes without saying these days, or at least without good data to back it up. That’s not to say that the number of manufacturing jobs in America hasn’t dropped off–that much is certain. But is the number of people employed in the manufacturing industry a good indication of that industry’s health?

The answer is no, and here’s why.

First: Consider the chart below from the Mercatus Center’s Veronique de Rugy:

As you can see, even though the number of manufacturing jobs has consistently fallen since around 1980, US manufacturing output is much higher these days than ever before (except for just prior to the 2008 financial crisis). As de Rugy explains, this means the average American manufacturer is more than three times more productive today than they were in 1975. This reveals true economic progress–producing more with less.

Second: In a recent paper, Clemson University’s Bruce Yandle (also affiliated with the Mercatus Center) explains a fact about manufacturing in America I hadn’t considered before. He writes,

“Information technology that drives the cost of contracting and managing is the big unknown in all this. As I have pointed out before, the US economy, especially the manufacturing economy, is disintegrating. Picture a large paper producer, for example. In decades past, that producer would have its own fleet of trucks, timber operation, steam-generated electricity, internal shop for major repairs, large engineering department, finance department, human resources, and distribution and warehousing operations, all as part of one paper-producing firm. Today, that same paper producer contracts out for transportation, logistics, engineering, energy, heavy maintenance, and for some finance and personnel services.

As contracting costs have fallen, the firm has disintegrated. Dramatic improvement in information technology has been the driver. The result? A smaller share of the workforce is employed in paper manufacturing, but more paper is being produced.”

He doesn’t cite data to back up this story (I’m not even sure if any relevant metrics exist), but it makes sense to me and jives with my own tangential experience with the manufacturing industry.

I work at a sales agency that sells for small manufacturers throughout Pennsylvania. Often, we will facilitate everything from product conceptualization to market research and advertising to shipping to final sale for our manufacturer client, leaving them to do only what they do best–manufacture product (don’t you just love the division of labor?). The result is that the number of people working for the manufacturing firm is trimmed down until only those people working on the assembly line, plus a few supervisors, remain employed at that firm. The few dozen employees at my workplace–accountants, marketers and salespeople who, decades ago, might have been employed directly by the manufacturer–are categorized under “business services.” This grows the “professional business services” labor force and a shrinks the “manufacturing” labor force despite no decrease in manufacturing output. If anything, outsourcing business services like shipping and sales–the cost of which is falls with advancements in information technology–only increases manufacturers’ efficiency.

I could say more about the state of manufacturing in the US. Suffice it to say, though, that the number of jobs in a particular industry is no indication of that industry’s overall health. Jobs are important, but that’s an entirely different discussion.

“We live on a planet with a constraint called gravity. We can adapt to the law of gravity by creating innovations such as airplanes, but we cannot defy the law of gravity by jumping off a building without a parachute. The same is true in economics and of the law of scarcity. We falsely believe that somehow if government legally counterfeits intrinsically worthless paper or spends someone else’s money we will be able to upend the law of scarcity.”